Which one should I invest in? Stocks or mutual funds?Asked
Investing in Mutual funds is any day a better option then investing in stocks. Let me tell you the benefits of investing in mutual funds as compared to investing in stocks:
1. Investing in stocks require a lot of time in deciding on which shares to buy where as it takes lesser time to learn about each mutual fund.
2. Intensive research on companies along with overall industry and market sentiment is require for investing in stocks. Fund house with professional fund manager do all research for mutual funds like picking right stocks, tracking them and keep you updated with current market scenario.
3. It requires well amount of cash to diversify your portfolio of stocks. Mutual fund by default have diversified portfolio by investing in collection of stocks and /or bonds, thereby reducing overall risk on investment.
4. Investing in stocks are much riskier than investing in mutual funds. Also, mutual funds may give you return as comparable to stocks if you have high risk appetite.
So, for those who follow stock markets and wish to invest in the shares offered by various companies, but they fear that they don’t have enough knowledge or don’t have sufficient time to keep track on and follow the latest buzz about the dynamic market, mutual fund is the perfect solution for them as investing directly in equity market is a risk, not everyone willing to take.
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Mutual funds is one of the most regulated industry in the country and comes under the purview of SEBI, the level of regulation is so high that there are even limits set for the expense ratios that the mutual funds can charge to the investors, the annual compensation of the the top management of the AMC is also made public by the AMC’s themselves. Soon SEBI is also going to put a limit on number of similar schemes an AMC can operate in the market. Apart from the government regulations, mutual funds are run by professional fund managers who reach this position after having decades of experience in the capital markets.
One biggest advantage it provides to the investors is that they can invest in a blend of equity, debt and liquid funds not only in a lump sump amount but also through SIPs where they get the advantage of rupee cost averaging and also have to invest only a small amount of their income every month.Over the years some of the largest schemes in the country have consistently given an average return of 15-18% year on year over the last 15 years and have consistently outperformed the market with their superior performance.
Directly investing in stocks can give huge returns at the same time there is considerable amount of risk and also at the same time also requires knowledge to study, predict and analyse stock market movements.
Investors like Rakesh Jhunjhunwala and warren Buffet have built huge fortunes of wealth because of their strong fundamental and technical analysis and their ability to spot gems in their early stages. And therefore investing is stocks is a all about research, experience, knowledge and risk taking ability of the investor. There is no maximum and minimum limit to . return in stocks but direct investing is not everyone’s cup of tea.
This is a most common question for the people who are in the early phase of investment. Stocks and mutual funds both are financial instruments which provide different combination of risks and returns but mutual funds are considered safest in comparison to stocks.
When investing in stocks of a particular company, you are taking the ownership of that company which is allocated on the basis of the number of shares purchased by the investor. But is requires considerable time and effort to select companies which will provide you the expected returns. This is considered direct way of investing but it is accompanied by higher risk exposure. I’m not saying an individual cannot gain returns from market individually but the odds are against in most of the cases.
Investing through mutual funds reduces the risk of direct investing. This is considered passive way of investing. The fund manager selects companies or bonds of higher growth and operates within institutional framework which enforces certain ground rules of investing. Mutual funds provide discipline diversification of your capital in portfolio which minimizes the risk. Another advantage of investing through mutual funds is that you can invest with a small investing amount of Rs. 500 in a SIP.
Mutual funds have the added benefits of diversification and it protects the investor from taking extreme risks. The route of mutual funds is best suited to investors who don’t have time to watch the markets or to invest time in analysis of market growth. No demat account is necessary to invest in mutual funds. An investor can select the mutual funds which meet the investment objectives and risk appetite of investor.
There are essentially two ways to make money - by working and by having your money work for you. Investing provides an opportunity for your money to multiply, thus securing your future to some extent. Today, there are a lot of investment options available, and it can get intimidating to a consumer with little knowledge. Traditionally, Stocks have been most preferred choices of investments, though Mutual Funds have also recently gained prominence.
Stocks are instruments that represent ownership interest in the company that originally issued it, and are one of the most liquid instruments. While steady stream of return (dividend) is generally paid to shareholders, they also stand to gain from capital appreciation, which is basically an increase in the price of the share. It is necessary to open a demat account before you can invest in stocks.
Investment in stocks however, is also very risky as it can completely erode invested capital if the investment decision is not backed by rational thinking and systematic analysis. Also, acquiring the expertise to conduct fundamental and technical analysis takes years, exposing the investor to effects of impulsive decision.
Mutual Fund is an investment tool wherein the fund management house collects funds from various investors and then invests the same in diversified securities that may include equity shares, debt instruments, etc., thus spreading the risk over a number of securities. An easier to understand analogy is that of a few friends contributing money and purchasing a pizza. The friends (investors) then share the pizza (returns).
Diversification is one of the most prominent benefits offered by mutual funds. It protects the investor from the hazard of investing in one or two securities, which are inherently highly volatile. It also has the added benefit of the fund being managed by professional and highly skilled managers, in exchange for a fee. This investment route is best suited to investors who do not have the time or the skills to undertake in-depth research and analysis before investing their money. No demat account is necessary to invest in Mutual Funds. An investor must take care to select the one that best meets his risk appetite and investment objective. Mutual Funds are usually bought and sold at Net Asset Value, which is determined at the close of trading hour everyday. For a novice, investment in Mutual Funds makes logical sense as it earns a handsome return at minimum risk.
Therefore, in my opinion, Mutual Fund is the best investment tool for a novice looking to earn a handome return on investment. It will also enable the retail investor to learn the art of systematic investment in the stock market.